Understanding Dynamics of Strategic

Decision Making in Venture Creation: A

Process Study of Effectuation and
Causation
I.M.M.J. Reymen; Petra Andries; J.J. Berends et al.

2015

Our observations suggest a hybrid perspective on strategic decision-

making, demonstrating how effectuation and causation logics are
combined, and how entrepreneurs’ emphasis on these logics shifts
and re-shifts over time

Abstract
The process of new venture creation is characterized by the need to decide and take action
in the face of uncertainty. Especially in the context of technology-based ventures
uncertainty is substantial, posing difficulties for strategic decision-making based on
prediction and planning. As alternative, more flexible and adaptive decision-making logics
are being advanced. This study draws upon effectuation and causation as examples of
planning-based and flexible decisionmaking logics, and investigates dynamics in the use of
both logics. The study applies a longitudinal process research approach to investigate
strategic decision-making in new venture creation over time. Combining qualitative and
quantitative methods, we analyze 385 decision events across nine technology-based
ventures. Our observations suggest a hybrid perspective on strategic decision-making,
demonstrating how effectuation and causation logics are combined, and how
entrepreneurs’ emphasis on these logics shifts and re-shifts over time. From our data, we
induce a dynamic model which extends the literature on strategic decision-making in
venture creation, illustrating how external and venture conditions - including not only
uncertainty but also resource position and stakeholder pressure - lead to changes in
venture scope, and thereby to shifts in the use of decision-making logics.

Study subjects
9 cases
The ventures were all founded by teams consisting of two to four entrepreneurs who also
represent their initial employee bases. Table 1 and Table 2 summarize the nine cases.
====Insert Table 1 and 2 about here ==== Data collection We conducted interviews with
multiple respondents and collected archival documents to triangulate information (Yin,
2009)

Findings
Pearson correlations across events indicated only one significant correlation among the
four dimensions of effectuation2; the dimensions of causation were not significantly
correlated with each other

Comparing cases targeting an existing versus a new market showed no significant

difference in the use of effectuation and causation (Table 4), using a KruskalWallis test

As explained by one of the founders: Through his [one of the founders] family business he
had contacts with Delhaize. They agreed to set up an experiment ...The results were
phenomenal: the total turnover of all apples in these Delhaize locations rose by 100%, the
turnover for his own apple varieties rose by 300%, and the frequency of visits to these
shops increased by 60%

Scholarcy Highlights
 The process of new venture creation is characterized by the need to decide and take
action in the face of uncertainty (e.g., Alvarez and Barney, 2005; McMullen and
Shepherd, 2006; Sarasvathy, 2001), and this is the case for technology-based ventures
 Alvarez and Barney (2005) and Alvarez (2007) explain that this uncertainty makes it
difficult for the entrepreneur to know how to organize the emerging venture. They
argue that we need a better understanding of the decision-making tools that
entrepreneurs use to organize ventures in such uncertain contexts. We focus on this
important mechanism, i.e. entrepreneurial decision-making logics, and contribute more
broadly to understanding the role of strategic decision-making in the venture creation
process under conditions of uncertainty
 Coding for effectuation and causation Building on studies like Chandler et al (2011),
Read et al (2009b) and Fisher (2012), we considered effectual and causal decision-
making at the level of ventures, by focusing on decisions taken by the entrepreneurial
teams for the ventures, and not at the level of individuals
 We focused on recursive relations between strategic decision-making and venture
creation: strategic decisions shape a venture, and outcomes of such decisions in turn
influence the external and venture conditions, which in turn affect the use of decision-
making logics
 We find that strategic entrepreneurial decision-making follows a hybrid logic that uses
both effectuation and causation simultaneously, while the dominant logic dynamically
shifts over time
 Comparing cases targeting an existing versus a new market showed no significant
difference in the use of effectuation and causation, using a KruskalWallis test
 We focused on technology ventures, as these are confronted with substantial
uncertainty regarding technologies and markets, future studies should verify whether
the same decision-making dynamics are present in ventures that are confronted with
other types of uncertainty beyond technology

Scholarcy Summary

Introduction
The process of new venture creation is characterized by the need to decide and take action
in the face of uncertainty (e.g., Alvarez and Barney, 2005; McMullen and Shepherd, 2006;
Sarasvathy, 2001), and this is the case for technology-based ventures.

Alvarez and Barney (2005) and Alvarez (2007) explain that this uncertainty makes it
difficult for the entrepreneur to know how to organize the emerging venture

They argue that we need a better understanding of the decision-making tools that
entrepreneurs use to organize ventures in such uncertain contexts.

We focus on this important mechanism, i.e. entrepreneurial decision-making logics, and

contribute more broadly to understanding the role of strategic decision-making in the
venture creation process under conditions of uncertainty.

More flexible, experimenting and adaptive approaches appear to better fit with uncertain
decision-making contexts (Alvarez and Parker, 2009; Andries et al, 2013).

The current study addresses this gap by shedding light on whether, how, and why decision-
making logics might be alternated or combined, i.e., adapted, over time

Objectives
Case selection Because our aim was to extend theory on decision-making dynamics in
venture creation, we used purposeful sampling to select cases, by seeking information-rich
cases that facilitate theoretical inference (Gerring, 2007; Eisenhardt and Graebner, 2007)

Findings
Pearson correlations across events indicated only one significant correlation among the
four dimensions of effectuation; the dimensions of causation were not significantly
correlated with each other.

Comparing cases targeting an existing versus a new market showed no significant

difference in the use of effectuation and causation (Table 4), using a KruskalWallis test.

As explained by one of the founders: Through his [one of the founders] family business he
had contacts with Delhaize.
They agreed to set up an experiment ...The results were phenomenal: the total turnover of
all apples in these Delhaize locations rose by 100%, the turnover for his own apple varieties
rose by 300%, and the frequency of visits to these shops increased by 60%

Discussion
This longitudinal study investigated strategic entrepreneurial decision-making during the
venture creation process.

We focused on recursive relations between strategic decision-making and venture creation:

strategic decisions shape a venture, and outcomes of such decisions in turn influence the
external and venture conditions, which in turn affect the use of decision-making logics

This enabled us to advance understanding of dynamics of strategic decision-making in the

process of venture creation.

We find that strategic entrepreneurial decision-making follows a hybrid logic that uses both
effectuation and causation simultaneously, while the dominant logic dynamically shifts over
time.

Our findings –synthesized in our dynamic model of entrepreneurial decision-making–

support and elaborate on the insights of Alvarez and Barney (2005) regarding the context-
dependence of entrepreneurial decisionmaking for venture creation

They broaden our understanding of conditions and drivers of effectuation and causation
beyond initial uncertainty and entrepreneurial experience.

Our findings confirm expectations that effectual and causal logics are at work
simultaneously (Dew et al, 2011), and contrast with studies treating effectuation and
causation as mutually exclusive, opposing logics (e.g., Brettel et al, 2012; Dew et al, 2009)

Conclusion
We extend research on decision-making under uncertainty as an important element in the
organizing process of entrepreneurial firms (Alvarez and Barney, 2005).

By studying patterns in ventures’ effectual and causal decision-making in-depth and over
time, we find that entrepreneurs typically employ hybrid decision-making logics, and shift
from one dominant decision-making logic to the other.

We explain these shifts, highlighting the intermediary role of ‘venture scoping’.

We enrich the understanding of conditions influencing the use of decision-making logics,

identifying venture resource position, and stakeholder pressure in addition to uncertainty
as drivers of venture scoping
Confirmation of earlier findings
Second, we advance a novel, dynamic model of what drives entrepreneurs’ strategic
decision-making, thereby extending the literature on planning-based and flexible decision-
making approaches in venture creation. Our findings support and extend the work by
Alvarez and Barney (2005) by showing that perceived changes in external and venture
conditions (including uncertainty but also resource position and stakeholder pressures)
lead to shifts in the use of decision-making logics

In contrast to causation, effectuation actively embraces uncertainty and increases control

through co-creative processes that start from existing means and accumulate commitments
(and resources), which in turn allow ideas to converge and specific goals to emerge
(Sarasvathy and Dew, 2005). We draw on the distinction between effectuation and
causation as specific decision-making logics because it emerged in the field of
entrepreneurship (Sarasvathy, 2001), has developed into an established perspective, and
has proven its value in broader domains including strategy (Wiltbank et al, 2006) and
innovation (Berends et al, 2014; Brettel et al, 2012)

The findings indicate that entrepreneurial decision-making is most commonly following a

‘hybrid’ logic that contains and combines elements of both effectuation and causation. Thus,
our findings confirm expectations that effectual and causal logics are at work
simultaneously (Dew et al, 2011), and contrast with studies treating effectuation and
causation as mutually exclusive, opposing logics (e.g., Brettel et al, 2012; Dew et al, 2009)

This finding challenges studies that treat decision-making logics as stable tendencies,
determined by founding conditions such as experience and uncertainty. The overall pattern
that emerged from our analysis lends support to the expectation that flexible decision-
making is more prominent in the earlier stages of venture creation, with a transition
to more planning-based decision-making over time as both the new venture and its
market mature (Alvarez and Barney, 2005; Sarasvathy, 2001)

We extend this thinking further by presenting evidence on what leads to changes in venture
scoping, and, as a consequence, in decision-making logics. Our process study supports the
theoretical argumentation by Alvarez and Barney (2005) that venture creation processes
are characterized by changing levels of risk versus uncertainty, and that these changes will
require entrepreneurs to adjust their decision-making logic

Counterpoint to earlier claims

Past research has focused on initial conditions to explain the usage of effectuation and
causation logics, thus we compared the cases with regard to important initial conditions
that have been identified in prior research: level of uncertainty (e.g., Sarasvathy, 2008;
Brettel et al, 2012) and level of entrepreneurial experience (e.g., Dew et al, 2009; Politis et al
2012). ==== Insert Table 4 about here ==== Key sources of uncertainty are the
novelty of the venture’s technology and the novelty of the market (e.g., Sarasvathy,
2001)

This result extends earlier findings that resource constraints stimulate resourcefulness and
lead to a search for creative solutions by using flexible decision-making logics (Baker and
Nelson, 2005; Carter and Van Auken, 2005; Mosakowski, 2002). Interestingly, these
findings are at odds with the more general observation of rigidity and narrowing of
focus and scope observed when larger organizations face resource constraints (cf.
Staw et al, 1981; Kaul, 2012), suggesting that firm size may moderate the impact of resource
positions

We also see opportunities for research exploring whether additional conditions - next to
changes in perceived environmental uncertainty, venture resource position, and
stakeholder pressure - lead to changes in venture scope, thereby complementing our model.
Also, it needs to be noted that whereas the strength of process research is to identify
necessary conditions, variance research is needed to determine whether the
necessary conditions that we identified are also sufficient conditions for change in
the use of decision-making logics (Mohr, 1982)

Contributions
In sum, we extend research on decision-making under uncertainty as an important element
in the organizing process of entrepreneurial firms (Alvarez and Barney, 2005). By studying
patterns in ventures’ effectual and causal decision-making in-depth and over time, we find
that entrepreneurs typically employ hybrid decision-making logics, and shift from one
dominant decision-making logic to the other. We explain these shifts, highlighting the
intermediary role of ‘venture scoping’. An entrepreneur’s narrow focus on a ‘holy grail’
leads to causal decisionmaking, while a broad scope pursuing several options
simultaneously leads to effectual decisionmaking. We also enrich the understanding of
conditions influencing the use of decision-making logics, identifying venture resource
position, and stakeholder pressure in addition to uncertainty as drivers of venture scoping.

Limitations
Limitations and suggestions for further research A limitation of the current study is its
reliance on retrospective data, which could impact the accuracy and completeness of data,
in particular on earlier phases of the case histories. We took measures to limit retrospective
bias, such as using both documents and interviews, focusing on significant decision events
(Chell, 2004), utilizing event lists (Belli, 1998), and ensuring that decision events were
mentioned by the founders and at least one other data source. In general, where
retrospection affects data, it typically leads to more sanitized, rationalized versions of
history (Schwenk, 1985), associated in particular with elements of causal decision-making.
Thus, we do not expect our key findings (effectual decision-making in the earlier stages and
multiple shifts in logics) to be explained as an effect of retrospection. Nevertheless, future
research would benefit from documenting dynamics in real time.

Future work
Limitations and suggestions for further research A limitation of the current study is its
reliance on retrospective data, which could impact the accuracy and completeness of data,
in particular on earlier phases of the case histories. We took measures to limit retrospective
bias, such as using both documents and interviews, focusing on significant decision events
(Chell, 2004), utilizing event lists (Belli, 1998), and ensuring that decision events were
mentioned by the founders and at least one other data source. Where retrospection affects
data, it typically leads to more sanitized, rationalized versions of history (Schwenk, 1985),
associated in particular with elements of causal decision-making. We do not expect our key
findings (effectual decision-making in the earlier stages and multiple shifts in logics) to be
explained as an effect of retrospection. Future research would benefit from documenting
dynamics in real time.

Whilst we found evidence for the hybrid use of effectual and causal decision-making logics,
future research could clarify whether there may be certain decision areas that lend
themselves well to either effectual or causal decision-making. We focused on technology
ventures, as these are confronted with substantial uncertainty regarding technologies and
markets, future studies should verify whether the same decision-making dynamics are
present in ventures that are confronted with other types of uncertainty beyond technology.
Large corporations are increasingly confronted with uncertainty, e.g., arising from new
competitors in new markets or the increasing speed of development. Future research may
test our dynamic model of strategic decision-making in a corporate context.

To advance theory on decision-making processes in new venture creation processes under

uncertainty, future research could explore the consequences of hybrid decision-making
logics and adaptive processes of venture scoping on venture type. Given that the use of
these decision-making logics depends on the presence of uncertainty about the value of
opportunities and residual rights, we might expect that these types of decision-making
logics may be associated with different types of entrepreneurial firms (Alvarez and Barney,
2005). We hope to inspire future research that links shifts in the use of effectual and causal
logics and their combination, to the speed and efficiency of venture creation processes,
venture growth, survival and profitability. This study focused on effectual and causal
decision-making logics as examples of planning and flexible decision-making approaches
more generally. We suggest that the hybrid decision-making pattern uncovered in our study
may well generalize to the interplay of planning and flexible decision-making approaches
more generally, which often are treated as mutually exclusive. Further research covering a
broader range of decision-making approaches is warranted.